Will More State AGs Drop Their Opposition to the Airline Merger?

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Last week, it was announced that Texas would be dropping its lawsuit against the proposed merger between US Airways (UNKNOWN: LCC.DL  ) and American Airlines parent company AMR (UNKNOWN: AAMRQ.DL  ) . However, many other states are still pressing forward with their lawsuits. So what chance do the airlines have of getting more states to drop their lawsuits.

Texas, probably the easiest one
Of all the states that filed lawsuits to block the merger, Texas' seemed most out of place. The new American Airlines Group would be headquartered in Fort Worth, Texas, where the current American Airlines is and would likely bring more jobs and flights to the area as the Dallas/Fort Worth International Airport would become a major hub for the larger airline.

Because of this, the Texas lawsuit was likely just a move to extract relatively minor concessions regarding service to smaller cities (which ended up being part of the settlement). But other states have more on the line and situations there may be more difficult.

US Airways hub states
The states of Arizona and Pennsylvania have a couple of things in common. Both have a major US Airways presence in one of their cities (Phoenix, Ariz., and Philadelphia, Pa.) and both states have filed lawsuits opposing the airline merger. The states' fears surrounding this merger likely stem from the hub reductions/eliminations seen when Delta Air Lines (NYSE: DAL  ) merged with Northwest Airlines in 2008.

Like US Airways and AMR, Delta and Northwest promised increased service, but the record of the merger has been quite different for the now-smaller Delta hub of Cincinnati and the now de-hubbed Memphis Airport, formerly a Northwest Airlines hub.

Regardless of the economic benefits of keeping Phoenix and Philadelphia as fully functional hubs, these states will probably require the toughest negotiating and may even go to trial if concessions cannot be agreed upon.

Labor pressure
Management and unions are often seen as opposing forces in corporate America, but in the case of the airline merger, management and the unions are on the same side. While management is likely negotiating with state attorneys general and the Department of Justice, unions for US Airways unions and American Airlines are staging rallies and pressuring AGs to support the airline merger.

And it makes sense, too. As part of the merger, workers at both airlines have been promised pay increases, increases that are unlikely to happen if the merger fails. Additionally, a merger failure at American Airlines would send the airline back to the reorganization process, where additional cuts may need to be extracted.

Reports are surfacing that unions are pressuring Florida and Virginia to drop their lawsuits against the merger. In the case of these states, the merger concern relates more to a lack of competition than to job losses. Virginia is home to the Washington National Airport, where the new American Airlines Group would control nearly 70% of slots if concessions are not made. And Florida is home to a major American Airlines presence that would be strengthened in the event of a merger.

Settlements in these states are more likely to deal in route concessions to prevent the new American Airlines Group from dominating certain airports. Slot concessions at the Washington National Airport had been discussed prior to the DOJ and state lawsuits and are likely to be part of a final settlement if one is reached.

Airline uncertainty
With Texas now out of the airline merger lawsuit, the path is open for other states to settle with the airlines. However, Texas was one of the easiest states to settle with due to the planned structure of the new American Airlines Group. From this settlement, it is likely that the airlines are currently negotiating with other states that have additional objectives in their lawsuits. With labor on their side, the airlines have plenty of firepower between themselves and their legal teams. Investors should look at more developments regarding the state of negotiations to see if states not in Texas' situation are willing to settle.

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  • Report this Comment On October 07, 2013, at 6:23 PM, Tyeward wrote:

    Most other states really don´t stand much of a chance with their justification regarding this merger. The only states that have any real justification are the ones that are in fear of a reduction of service or closure of hub stations. I think Pennsylvania is not really looking at this properly. They seem to be looking at JFK up the street as a direct threat to operations at PHL if there is a merger. Quite the opposite. PHL stands to actually grow due to connecting traffic being thrown in their direction to free up the O&D market out of JFK. PHL is in an excellent location within the Megalopolis. That airport is actually very strategic for connections, and best of all, it´s a fortress hub. Charlotte is in the same boat. It has major room for growth and can play a major key role if the combined carrier goes along with it´s codeshare with Gulf carriers. People have to remember that CLT is the second largest financial center in the U.S and that means it has quite a bit of international pull as a financial heavy weight. I wouldn´t mess with PHX either. I would however push to try and get more corporate contracts. PHX is the hub where you want to give the carrier incentive to remain as is. Get the business community and industry there involved in floating that justification for the combined carrier.

  • Report this Comment On October 08, 2013, at 12:37 PM, Inspectigator wrote:

    AMR plans to shed American Eagle, and nobody expects Eagle to survive long alone. Eagle is the country's largest regional airline, and their failure will mean losses of service to a lot of markets. The Regional Airline Association is already predicting loss of service to many markets as their members cut back, this would be in addition to those expected cuts. In a merge with USAir, Eagle is expected to continue operating, gradually cutting back as regional feed contracts are let to Republic, Skywest, etc.

    The difference to small markets will be significant in the two possible outcomes, and these states opposing the merger are likely to lose much needed service and competition at their small airports. I haven't seen the numbers that justify any of these states opposing the merge, I can only assume they have political reasons.

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